Amid the chaos created by Elon Musk’s tweet last week that he intends to take his car company Tesla private, one aspect has stood out: Musk’s assertion that he has “funding secured” for the deal.
That’s a flat factual statement. Numerous legal experts have opined that if it’s untrue, Musk could be in big trouble, for he could then be guilty of making a material misstatement and, by extension, manipulating his stock. Market mavens have been waiting for some amplification of the funding claim for six days, preferably via a corporate disclosure. But none came until Monday morning, in an “update” Musk posted on Tesla’s website.
Here’s the uh-oh: Musk doubled down on labeling the funding, which he says comes from the Saudi Arabian sovereign wealth fund, “secured”; but his description makes it sound highly conditional, not anything like “secured.”
Musk’s morning post prompted not a few business and technology news sites to declare the deal done. At Ars Technica, Timothy B. Lee wrote that the post “lays to rest a mystery that has bedeviled Wall Street.”
Is that so? We’d argue that reading between the lines, Musk’s statement makes the deal sound even more dubious. Tesla shares barely budged on the news, trading as we write at $354.20, down about a third of a percent. That doesn’t make it seem that Wall Street is convinced.
Musk claims the Saudis held several meetings with him dating back to the beginning of 2017 “to try to move forward with a going private transaction.” He says the latest meeting occurred July 31, at which the fund’s managing director “strongly expressed his support for funding a going private transaction for Tesla at this time. I understood from him that no other decision makers were needed and that they were eager to proceed.”
Musk says that from that, he concluded that “it was just a matter of getting the process moving.”
But here’s the rub. Musk also says that the deal is “subject to financial and other due diligence and their internal review process for obtaining approvals.” The Saudis, he says, “also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements.”
At the very least, that’s five questions that have to be answered before the Saudis put up any funding. Wrapped up in that reference to “regulatory requirements” is the question of whether the U.S. government would even permit the Saudis to take a controlling stake in Tesla; the Committee on Foreign Investment in the United States, or CFIUS, a Treasury Department agency that rules on foreign ownership of American companies, might well expect a say in the matter.
But those aren’t the only questions. Musk writes, “obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction.” That’s true in the sense that there’s more money in the sovereign fund than the $60 billion to $70 billion that would be required to take Tesla private at the $420-per-share price Musk is talking about. But that’s not the same as the fund being willing to take on the deal on its own — or even capable of doing so, given that the deal would require $60 billion or possibly more.
The Saudi fund is worth about $250 billion, according to estimates cited by the Financial Times. The fund is hoping to collect another $70 billion to $100 billion from a planned initial public offering of the Saudi government-owned Saudi Aramco oil company, but that IPO has been delayed.
An investment of more than $60 billion in a single company would be extremely uncharacteristic of the Saudi sovereign fund. The fund made a total of only $54 billion in investments last year, according to Bloomberg. Among its commitments going forward are a $45-billion stake in a technology fund sponsored by Softbank Group and $20 billion in an infrastructure fund assembled by Blackstone Group. But those are diversified investment pools.
The Saudis have taken a stake in Tesla of “almost 5%,” Musk confirmed Monday. But that comes to less than $3 billion at Tesla’s current share price.
It’s proper to note that the assertions about the Saudis’ willingness to fund the deal on their own all come from Musk alone. The Saudis haven’t been talking.
But by announcing their intentions on their behalf, Musk has put immense pressure on the Saudis to speak up. He said that he left the July 31 meeting “with no question that a deal with the Saudi sovereign fund could be closed.” What do the Saudis say?
And he may have put the Saudis in a box: If they confirm his statements, they will drive up the price of Tesla shares, making any going-private transaction that much more expensive for themselves. If they cast doubt, Tesla stock will crater, and so will the Saudis’ investment.
Musk’s announcements also have placed immense pressure on Tesla’s board, which comprises himself, his brother and seven ostensibly “independent” directors, some of whom aren’t independent by any dictionary definition of the word. The Tesla board plainly was blindsided by Musk’s original tweet on Aug. 7; the directors said afterward that they had had discussions about taking the company private, but indicated that the deal was nowhere near at a disclosable stage.
Musk offered further details on his proposed deal that make it sound even weirder than it did after his first tweet. He said he is reaching out to the company’s biggest investors because “understanding whether they had the ability and desire to remain as shareholders in a private Tesla is of critical importance to me.”
That’s a big “whether.” Other than his own holding of 22% (as of Dec. 31) the biggest holders include Fidelity (about 6.6%) and T. Rowe Price (9.1%), according to recent disclosures. The shareholdings of these mutual fund firms may well be in funds that can’t be invested in private securities. So to some extent they’d be out. Institutions hold about 60.5% total, according to Nasdaq.
Musk also has talked about creating some sort of fund that would allow individual investors to “roll over” their publicly trade shares. “My best estimate right now is that approximately two-thirds of shares owned by all current investors would roll over into a private Tesla,” he wrote Monday.
He didn’t state his grounds for that estimate, but it sounds, er, ambitious. He’d be asking investors who now can buy or sell at will to stomach converting into shares that can’t be sold except perhaps twice a year, at a price set by Tesla. Who would increase their investment risk that way?
In any case, creating an investment instrument allowing individual investors to take part in a private company as though it’s public would probably be nixed by the Securities and Exchange Commission. The SEC normally judges a company with more than 2,000 investors to be effectively public, doesn’t normally look kindly on investment schemes that seem aimed at circumventing its rules.
Pools that bring together lots of investors for private companies typically require that all the participants be “accredited” investors, which means they must have net worth of at least $1 million and income of at least $200,000 a year. Those aren’t small investors.